Can the Galaxy Alpha Save Samsung?

Samsung's (NASDAQOTH: SSNLF) oft-rumored Galaxy Alpha smartphone has finally arrived. The phone is slimmer and sleeker than the company's flagship Galaxy S5, and even thinner than Apple's (NASDAQ: AAPL) iPhone 5s. It also adds a metal frame, which may give it a more premium feel. Even cooler, at least for techies, is that it features Samsung's first 20-nanometer system-on-chip. It even offers -- according to GSMArena tests -- class-leading performance.

With all of these goodies, is the Galaxy Alpha enough to save Samsung? Or is this yet another technically interesting device that could still face business-related challenges?

The problem so far: Why Samsung needs "saving"

Samsung is an immensely profitable company that last quarter generated approximately $7.1 billion in operating profit -- and that was a bad quarter for the South Korean consumer electronics company. However, industry observers and investors alike tend to be very forward looking, and there have been some very troubling trends in the company's mobile business.

In Samsung's most-recent quarter, the company saw mobile operating profit drop 31% from the prior quarter even though Samsung had just launched its latest Galaxy S5 in April. This drop was also on the order of 29.6% year over year, so the excuse that seasonality is to blame doesn't really hold water.

According to PCWorld, Samsung attributes its declining mobile profitability to pricing pressure from low-cost Chinese smartphone vendors and "sluggish demand in Europe."

Can the Galaxy Alpha reverse this trend?

The Galaxy Alpha appears to be a very attractive device that offers a good deal of functionality, and an enhanced industrial design relative to Samsung's prior efforts. However, remember that Samsung launched the Galaxy S5 -- its flagship handset -- back in April, and it, too, was a significant step up from the prior generation Galaxy S4. Despite that, Samsung still saw its second-quarter results disappoint.

Sure, the Galaxy Alpha is even thinner and lighter than the current Galaxy S5 flagship, and yes, it even has a metal frame; but are these game-changing features? Is the question even about features at this point?

Probably not

The problem with the "Samsung just needs metal to gain share" argument (or its close cousin, "Samsung needs to make more premium-looking phones"), is that rival Android smartphone vendor HTC has been selling smartphones with attractive metal bodies for quite some time. This hasn't helped HTC achieve anywhere close to the kind of sales volume or profitability that Samsung enjoys.

Further, Samsung phones are often compared to Apple's (NASDAQ: AAPL) iPhone, which is notable for its use of an aluminum chassis. While some seem to believe that having a metal chassis is a key point of differentiation for Apple, the relatively poor sales performance of the HTC One series over the years tends to contradict that. Apple's advantage -- and by extension, Samsung's problem -- runs far deeper.

How does Apple maintain its profitability?

Today, Apple appears to be back in the spotlight, particularly as the upcoming iPhone 6 launch has rallied a lot of optimism from investors. Despite not having a large-screen device available for sale, Apple still manages to dominate the high-end of the smartphone market from a profitability perspective. Apple generated $10.2 billion in operating profit last quarter, which was one of its seasonally weak quarters, to boot!

First off, Apple has a very differentiated operating system and application ecosystem -- if customers want to keep using their iOS apps, then they need to buy an iPhone. Though Android has gotten significant developer attention over the years, and most key mobile applications come to both Apple's iOS and Google's (NASDAQ: GOOG) (NASDAQ: GOOGL) Android, Apple's platform still generates more total revenue, according to TechCrunch.

This outsized revenue share for Apple's platform not only means that iOS users are less likely to want to switch ecosystems, but it also incentivizes developers to spend more time polishing iOS applications. The return on investment there is probably better than that from developing an application for Android.

Finally, Apple's brand -- which is a distinctly high-end one -- is extremely powerful. iPhones are generally perceived as being "premium" devices, and that perception allows Apple to command premium pricing, margins, and profits -- even if it often loses the "spec wars."

Can Samsung fight back?

Samsung doesn't have a differentiated software ecosystem, but what it does have is immense scale, a competitive cost structure, and a very powerful marketing machine. If Samsung decides to play hardball against the lower-cost vendors that are currently gobbling up marketshare -- and it appears that Samsung is willing to do so -- it could win back meaningful market segment share over time.

To be clear, the question here isn't about Samsung's viability as a major player in the smartphone market, but about whether Samsung can sustain its current level of profitability given the shifting market landscape. Samsung can probably deal with the low-cost vendors at the expense of margins, but the high-end of the market -- where much of the profitability in this market sits -- is likely to become even tougher for Samsung as Apple gets more aggressive with larger screen sizes.

Foolish bottom line

The Galaxy Alpha is yet another nice higher-end Samsung Android smartphone; but at the high-end, Samsung faces a significant threat from Apple and all of the intangible assets it can bring to bear in this fight.

At the low-end, however, Samsung has a good shot of reversing the share loss to competitors due to its cost structure and branding power; but, again, that victory may come at the expense of Samsung's margins and longer-term smartphone operating profits.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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